The numbers for the week – 19 Dec 22
Markets last week
Central banks spooked investors last week after raising interest rates, with the main ones (US Federal Reserve – Fed, Bank of England – BoE, European Central Bank – ECB) hiking by 50 bps, but the similarities stopped there. The Fed is clearly in a battle of communications with markets, which are reluctant to accept the verbatim message provided by Fed Chair Jay Powell. He said that rates will have to rise above 5%, that they will stay there until the inflation-reduction job is done and did not appear unduly concerned by the prospect of a recession. Many investors seem to be unwilling to accept this version at face value, with long-term US bond yields actually lower over the week and the market forecast for the terminal Fed Funds rate significantly below where the Fed sees it.
Some segments of the equity markets reacted negatively to the Fed’s comments, as they had priced in a higher willingness by the Fed to cut rates next year and took back the earlier bullishness based on Fed easing expectations.
The other central banks triggered different reactions in their respective markets. The BoE’s message was muddled by the fact that the vote to raise rates by 50 bps was split three ways, with one member wishing to hike more than 50 bps and two members not at all. This complexity seemed to direct investors towards a lower set of additional rate rises next year and hence impacted sterling but drove gilt yields higher. The ECB arguably delivered the most hawkish message in its history, with President Christine Lagarde even claiming that the ECB “needs to do more than what markets are pricing”. The surprising tone sent eurozone bond yields soaring and helped the euro vs. both the US dollar and sterling.
The backdrop of all these central bank meetings was data showing slower inflation in the US and the UK, but mostly driven by lower energy and commodities during the past few months rather than softer service price rises. The global economy is on a downward path but at differing speeds. The US still shows conflicting data and surveys, China is trying to emerge from a painful standstill, if not slump, European surveys point to a recovery from a low point and the UK still has a very strong job market, but surveys are indicating a recession is ahead.
The net result of all the central bank activity and data was a reversal in risk appetite from Thursday on. Bond yields rose sharply in the UK and Europe, but US treasury yields fell, the second such week. With risk off, the US dollar attempted a rally but only managed it against sterling, as the euro pushed higher. Oil prices bounced back but encountered growth concerns on Friday, finishing the week up at only 4%.
Equities were generally negative, with only Japanese shares remaining resilient whereas most other markets fell between 1% and 2% in sterling terms. The best sector was energy, the only one up for the week, but technology and materials fell 3% on average.
The fortnight ahead
Wednesday 21 Dec: Conference Board consumer confidence
Our thoughts: the consumer confidence index published by the Conference Board is one of the two main consumer surveys, the other one being the University of Michigan sentiment index. Although the consumer confidence index has been falling since the middle of 2021, it is not near the depressed levels of previous recessions and hence its path may be a good indicator as to whether we could be going to a consumer-led recession, as opposed to simply a manufacturing recession.
Friday 23 Dec: US Personal Consumption Expenditures (PCE) deflator and PCE core deflator.
Our thoughts: once again inflation is likely to move markets and the PCE gauge is less well-known than the Consumer Price Index (CPI) but the core PCE is used by the Fed as its inflation yardstick with a 2% target. The focus will be not only on how fast the numbers decline but also what the underlying components are doing and whether they are ’sticky’.
Friday 30 Dec: Chinese Purchasing Managers Index (PMI).
Our thoughts: there are high expectations for a rebound in economic growth coming from China, as the country reopens following its zero COVID-19 policy over the last two – three years. It may be premature to see a recovery so soon, but the PMIs are where the green shoots would be noticeable first. The Chinese consumer has taken a beating but may be willing to spend again, so the non-manufacturing PMI will be the one to watch, whereas the manufacturing PMI will still be driven by global industrial trends, which are weakening.
The numbers for the week
Central banks/fiscal policy
Central banks moved markets last week, with the Fed reiterating its inflation message, the ECB sounding more hawkish than ever, and the BoE split three ways on the vote
The Fed hiked rates by 50 bps to a range of 4.25%-4.50%. Fed Chair Jerome Powell acknowledged that the rate is now restrictive, but not restrictive enough. Wage increases are currently running about 5% per year, or about 2% faster than consistent with inflation falling to 2% again. “We still have some ways to go… We will stay the course until the job is done.” Fed officials see themselves raising rates another 75 bps next year, above the level that investors are betting on. The ‘dot plot’ (expected future rates recommended by each official) of the 19 participants had 17 of them predicting that Fed Funds will rise to 5.0% or higher next year, with a median forecast of 5.1%, up from 4.6% in September.
Chair Powell referred to the dot plot several times in the press conference, but the market seems to be sceptical about the Fed’s increasingly hawkish position, with December 2023 futures still around 4.35%.
The Fed’s Summary of Economic Projections anticipates GDP growth at just 0.5% next year and 1.6% in 2024, which is effectively an economic soft landing. Unemployment is projected to rise from 3.7% now to 4.6% at the end of next year. Headline Personal Consumption Expenditure (PCE) inflation is expected to moderate from 5.6% this year to 3.1% in 2023, 2.5% in 2024 and 2.1% in 2025.
Although the immediate market reaction to the Fed communications was rather subdued, the following day saw a significant drop in US equities and a decrease in long-term bond yields.
The BoE said that inflation may have peaked, whilst hiking rates to a 14-year high of 3.5%, although the vote was unusually split three ways, with 6 voting for 50 bps, 1 for 75 bps and 2 for no increase at all. This was considered a ‘dovish hike’ by markets and gilt yields fell together with sterling. Investors are still expecting another 1% in rate hikes from the BoE by next summer.
The ECB announced a 50 bp hike and signalled that the market should expect hikes at a 50 bp pace for a “period of time”. ECB President Christine Lagarde also insisted that “anybody who thinks that this is a pivot for the ECB is wrong”. This was a surprisingly hawkish message. After amassing €5trn of assets, the ECB announced the start of its quantitative tightening programme (i.e. selling assets) at €15bn a month from March, which is half of the rate at which they bought bonds during quantitative easing. President Lagarde said that the ECB needs to do more on rates than markets are pricing. As a result, bond yields surged in the eurozone, with German 10-year bonds picking up 14 bps on the day and Italian bonds 29 bps.
In addition, the Swiss National Bank raised rates by 50 bps to 1% with further increases not being ruled out and the Norges Bank (Norwegian National Bank) by 25 bps to 2.75% adding that the rate “will be most likely raised further in the first quarter of next year”.
United States
Sticky job market, mixed surveys and lower CPI do not provide a clear path ahead
Surveys: the National Federation of Independent Business (NFIB) small business optimism index rose from 91.3 to 91.9. Further, the percent of small businesses raising selling prices fell from 71% early in the year to 56% in November. The Empire Manufacturing survey (NY State) slumped from +4.5 to -11.2, whereas the Philadelphia Fed Business Outlook survey (“Philly Fed”) with which it is normally paired, rallied from -19.4 to -13.8. The S&P Global PMIs disappointed, with the manufacturing PMI falling from 47.7 to 46.2 and the services PMI from 46.2 to 44.4.
Inflation: the CPI (consumer price index) fell sharply from 7.7% to 7.1%, driven by drops in energy and commodity prices, although services inflation remained sticky. The core CPI (ex food and energy) also fell from 6.3% to 6.0%. Import prices also fell 0.6% in November, after -0.4% the prior month, whereas export prices fell 0.3% after -0.4%.
Housing: Mortgage Bankers Association (MBA) mortgage applications rose 3.2% after -1.9% the previous week.
Industry: industrial production fell 0.2% in November, including manufacturing production down 0.6%. Capacity utilisation fell from 79.9% to 79.7%. Business inventories rose 0.3% in October, up from 0.2%.
Consumer: retail sales fell 0.6% in November with the control group also down -0.2%
Employment: jobless claims were surprisingly bullish, at 211K down from 231K the previous week, with continuing claims almost unchanged at 1671K.
United Kingdom
Inflation presumed to be peaking at a double-digit level
GDP: October economic growth was positive after three negative months in the last four, with GDP growing at 0.5%, driven by strong services, up 0.6%, and the construction output, up 0.8%, whereas industrial production was flat and the trade deficit continued to detract from the economy.
Inflation: UK wages are rising at close to a record pace, with average earnings excluding bonuses 6.1% higher in the three months through October than a year earlier, the highest level since records began in 2001, except during the COVID-19 crisis. The CPI (consumer price index) fell from a peak of 11.1% to 10.7%, with the core CPI (ex food, energy, tobacco and alcohol) also easing from 6.5% to 6.3%.
Housing: the house price index rose from 9.9% year-on-year to 12.6% in October, above estimates.
Employment: the jobs market was still very strong, with the payrolled employees monthly change rising 107K in November, above the previous month at 79K and the claimant count rate staying at 3.9%. The ILO (International Labour Organisation) unemployment rate over the three months to October edged up from 3.6% to 3.7%.
Consumer: retail sales in November fell 0.4% including auto fuel or -0.3% excluding it for a year-on-year drop of 5.9% on both readings.
Surveys: the S&P Global manufacturing PMI fell further from 46.5 to 44.7 whereas the services PMI rose from 48.8 to 50.0.
Europe
Is the European economy bottoming?
Surveys: the ZEW expectations survey for the eurozone bounced back from -38.7 to -23.6. The expectations for Germany also improved from -36.7 to -23.3 and the current situation from -64.5 to -61.4. In France, confidence was fairly stable, with business confidence staying at 102, manufacturing confidence also unchanged at 101, the production outlook indicator rising from -10 to -6 and the own-company production outlook slipping from 17 to 16. The S&P Global eurozone PMIs improved, with the manufacturing PMI up from 47.1 to 47.8 and the services PMI up from 48.5 to 49.1.
Industry: EU27 car registrations rose 16.3% year-on-year in November, up from 12.2%. Eurozone industrial production fell 2.0% in October, down from +0.8% the prior month.
Trade: the eurozone trade balance in October improved, with the deficit narrowing from €36.4bn to €28.3bn.
Weak Chinese monthly data but improving Tankan survey in Japan
China: the November data release was weak. Industrial production fell from 5.0% year-on-year to 2.2%, retail sales dropped from -0.5% to -5.9%, fixed assets ex rural (i.e. investment) slid from 5.8% to 5.3%, property investment fell further from -8.8% to -9.8% and residential property sales from -28.2% to -28.4%. The surveyed jobless rate increased from 5.5% to 5.7%.
Money supply was mixed, with M0 rising 14.1% year-on-year in November from 14.3%, M1 from 5.8% to 4.6% and M2 from 11.8% to 12.4%.
Japan: machine tool orders fell 7.8% year on-year in November, worsening from -5.5%. Core machine orders, which tend to be much more domestic rose 5.4% in October, from a negative -4.6% previously.
The quarterly Tankan business survey was generally better: the large manufacturing index fell from 8 to 7, the large non-manufacturing index rose from 14 to 19, the small manufacturing index from -4 to -2 and the small non-manufacturing index from 2 to 6.
Exports and imports slowed down, with exports up 20.0% year-on-year in November, down from 25.3% and imports at 30.3%, down from 53.5%. The tertiary industry index (i.e. services) rose 0.2% in October, up from -0.2% the previous month.
The Jibun Bank PMIs were mixed, with the manufacturing PMI falling slightly from 49.0 to 48.8 whereas the services PMI increased from 50.3 to 51.7.
Oil/Commodities/Emerging Markets
Energy prices recovering over the past week but metals still lagging
There was a significant bounce in oil, after crude prices had previously taken back the whole year’s rally due to the impact of the eurozone US$60 cap on Russian oil. Anecdotally, it looks like Russian oil is finding its way to India below the eurozone price cap, whereas the Brent and WTI grades are still much higher than this level.
Copper and other industrial metals have been reflecting lower global economic growth during the past week, although iron ore continues to recover from its October low.
Gold had a flat week in dollars but improved 0.7% in sterling terms.
